In Case You Missed It – The Department of Labor has Issued a Finalized Rule on ESG Investing in ERISA Pension Plans

Washington, DC – The Department of Labor has finalized and released a new rule on tax-qualified retirement plans governed by the Employee Retirement Income Security Act (ERISA) in order to codify the extent to which Environmental, Social, and Governance (ESG) considerations factor into investment decisions. As laid out in the rule, ERISA plan fiduciaries may not invest in ESG vehicles when they understand an underlying investment strategy is to subordinate return or increase risk for the purpose of non-pecuniary objectives.
Today, massive unfunded liabilities plague pension plans across the country. Given the incredible financial shortcomings facing retirees, efforts to politicize pension fund investments is not only a divergence from fiduciary responsibility, but also an incredibly irresponsible act. This sentiment was reflected in an editorial by the Wall Street Journal board, where they note that “The reason asset managers largely oppose the new Labor rule is because they want to use worker retirements to promote their own political and financial interests. They want to charge higher fees for managing ESG funds even if they don’t produce better financial returns for beneficiaries. The DOL rule forbids them from doing that. Kudos to Labor Secretary Gene Scalia for standing up to these Wall Street complaints.”
They go on to say that “Asset managers like BlackRock, Fidelity and Vanguard say ESG funds perform better over the long-term, but the evidence is spotty. A Pacific Research Institute study last year found that the S&P 500 outperformed a broad basket of ESG funds over a decade by nearly 44%. One reason is many ESG funds excluded companies like Amazon, Netflix and Mastercard.”
At the Institute for Pension Fund Integrity, we are singularly focused on the objective of getting politics out of pensions and protecting the financial security of America’s workforce. These actions by the Department of Labor further codify the most basic tenet of fiduciary duty: investment decisions should be governed by considering risk and returns, not any outside political agenda.
As Secretary of Labor Scalia noted in a recent op-ed, “More than $10.4 trillion is held by private pension plans covered by ERISA. Those amounts exist for one purpose: to fund retirement benefits for the 139 million American workers covered by the plans.”
In a recent Forbes column, IPFI President Christopher Burnham states “There is a place for making these types of [investment] determinations, but it resides solely with elected officials – not plan fiduciaries. The Department of Labor should be commended for finalizing and implementing this new rule, and it is my hope that in the future our government officials will continue to uphold fiduciary duty as a cornerstone of pension fund management.”
“In the coming months, it is likely that the incoming Biden administration will look for opportunities to use their executive authority to counteract many of the rules and regulations put in place by President Trump’s cabinet. In this instance, the Department of Labor’s work should be embraced as a nonpartisan, forward-thinking effort to secure a stable future for America’s workers and retirees. It is my hope that this rule will be not only enshrined, but built upon.”
We at IPFI applaud the Department of Labor’s efforts to clarify and correct guidance on the fiduciary obligations of pension fund managers. This modernization of ERISA will ensure that pension investment strategies remain focused on fiduciary duty and the best risk adjusted return. It is out hope that in the future our government officials will continue to uphold fiduciary duty as a cornerstone of pension fund management.